| Editor's note: To close out the week here at Empire Financial Daily, we're turning things over to our friend and colleague Dan Ferris from our sister company Stansberry Research. In his Extreme Value newsletter, Dan focuses on some of the safest and yet most profitable stocks in the market: great businesses trading at steep discounts. His strategy of finding safe, cheap, and profitable stocks has led his readers to a long list of double- and triple-digit winners – including Prestige Brands Holdings (406%), Humboldt Wedag (249%), Icahn Enterprises (142%), Intel (133%), Berkshire Hathaway (125%), and many more. Right now, Dan sees a big opportunity in his favorite class of stocks. And to kick things off in today's essay, he explains an easy, one-click way investors can take advantage...
It's the Best Time in Nearly 100 Years for One of My Favorite TradesBy Dan Ferris  If you're an optimist at heart, you'll love today's essay...
Today, I'll recommend a trade that I've liked off and on for the past couple of years. This trade has already performed well since last fall... And right now, it's more attractive than it has been at any time in history – going back to at least 1928. But before I give away all the specifics, we must learn about different types of stocks... As you likely know, the stock market can be split many different ways... You can divide stocks into different groups by market cap, specific sector, current momentum, and much more. And as a dyed-in-the-wool value investor, one particular split always catches my attention – two broad groups of value stocks and growth stocks. Value-stock indexes generally contain the cheapest stocks (above a certain market cap) based on simple metrics like the ratios of price to book value, price to earnings, and price to cash flow. On the other hand, growth-stock indexes generally contain companies whose revenues are growing faster than the rest of the market at any given time. The fact that some pairs of value and growth indexes contain some of the same stocks is a topic for another day. But just know this today... Any overlap doesn't stop the indexes from performing differently – sometimes very differently – for many years at a time. What do I mean by differently? Well, over the past few decades, when growth stocks have performed well, value stocks have tended not to perform as well... and vice versa. I call it the "tick tock" of stock market history because it resembles the swing of a pendulum in a big grandfather clock. The pendulum swings toward value stocks for a while... then back toward growth stocks... then back toward value... then growth... then value... etc. If you're wondering why this happens, it's just a function of human nature... People tend to get excited about one group of stocks, then they get bored and switch to another group. Generally speaking, value stocks are seen as stodgy and conservative. So when investors are super optimistic and excited about speculating on new technologies and other growth stocks, they tend to leave the stodgier, more conservative stuff behind. (Oil and financial stocks are two good examples of the stodgier, value-type stocks today.) And when investors then feel like they've gotten burned by believing too deeply that a "new era" was dawning due to recent technologies, they turn back to the stodgy, conservative, old value stocks. Now, let's look at how value and growth stocks have exchanged market roles over the past two decades... We'll use the Russell 3000 Value and Growth Indexes to track the two groups of stocks. And we'll start with the most recent period, then go backward in time to the start of the 21st century. Since the bottom of the financial crisis in March 2009, growth stocks have outperformed value stocks. From March 1, 2009, through today, the Russell 3000 Growth Index is up roughly 656%, while the Russell 3000 Value Index has risen only about 277%... To understand why investors turned to growth stocks when they did, try to remember what was happening back in 2009... All stocks were down as fear and uncertainty reigned. But the worst performers were the banks, homebuilders, subprime mortgage lenders (all stodgier, value-type businesses)... and any other business tied directly to the housing bubble. That's because when the housing bubble burst, investors lost huge amounts of money and soured on those sectors. More than 100 banks failed in the bust – including large ones like Wall Street stalwart Lehman Brothers and savings and loan Washington Mutual. Home prices kept falling and didn't bottom until 2012, scaring investors away from any businesses connected to housing. When investors turned away from banks, homebuilders, and other value stocks, they sought opportunities elsewhere... They turned back to technology and other growth-related stocks. Of course, right now, you might be wondering why investors abandoned growth stocks to begin with. To answer that question and understand why value dominated in the run-up to the housing bubble peak, we must go back to late 2002 – the bottom of the dot-com bust. And as you can see in the following chart, value stocks trumped growth stocks in the aftermath of that bust. From the bottom of the dot-com crash in October 2002 until the peak of the housing bubble in October 2007, the Russell 3000 Value Index rose 112%, compared with a 90% gain in the Russell 3000 Growth Index over the same period... After technology, telecommunications, Internet, and other growth stocks crashed at the end of the dot-com bust, the Federal Reserve lowered interest rates. Lower interest rates meant lower mortgage payments... That made buying houses more feasible for many Americans. Investors felt burned by the popping of the Internet bubble. Even a cash-gushing, stalwart business like router and switch maker Cisco (CSCO) fell nearly 90% from peak to trough. Folks were fed up with losing money... so they switched to stodgier fare – like the then-cheaper homebuilders, banks, mining companies, and other similar stocks that had been neglected during the dot-com bubble. They also started to invest directly in houses... and TV shows about house flipping began to appear. That's really all the history we need... When the dot-com bubble blew up, investors switched from growth to value. Then, they switched back to growth after the housing bubble popped and triggered the Great Financial Crisis. And for the past decade-plus since then, growth stocks have been in charge. Growth... value... growth. You can guess what comes next.
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And even better, it looks like the latest transition from growth to value is well underway... Investors remained in love with growth stocks as the COVID-induced bear market of March 2020 passed and the rebound began. The Russell 3000 Growth Index rose 75% from its bottom on March 23, 2020, through the end of August, while the Value Index climbed 44%... But by September, the "stay at home" trade in fast-growing technology companies had largely played out. Talk of inflation began to pick up around this time... That's generally thought to be bullish for some of the more traditional value-stock industries – like oil companies (which might benefit from higher oil prices) and banks (which might benefit from larger interest-rate spreads). While growth stocks had outperformed their value counterparts most of the time since 2009, a potentially big change started happening at that point... Value took charge again. Take a look at the following chart... Since September 1, 2020, the Russell 3000 Value Index is up 34%. In comparison, the Growth Index has only climbed 22% over the same period. According to my friend Jason Goepfert at SentimenTrader.com, the correlation between value and growth stocks has never been lower going back to 1928. That means investors have never cared about the difference between value and growth more than right now. So right around the time that value is taking a breather for a few weeks and letting growth stocks catch up a little bit... value has never been more attractive compared with growth – going back nearly 100 years. In other words, the combination of a one-month dip in value's recent outperformance over growth and the biggest difference in investors' appetite between the two groups of stocks looks like the perfect moment to go long value stocks if you haven't already. So after more than a decade of you being told to buy every dip in growth stocks, in today's essay, I'd like to be the first person to tell you to buy the dip in value stocks right now! Now, you might be wondering exactly how to execute this trade... It's easy... A bunch of publicly traded exchange-traded funds ("ETFs") exist for this purpose. The Vanguard Value Index Fund (VTV) is the biggest value-focused ETF that I know... It tracks the CRSP U.S. Large Cap Value Index, which as its name implies, measures the return of hundreds of U.S. large-cap value stocks. VTV's roughly 335 holdings include Berkshire Hathaway (BRK-B), the ETF's largest position, and ExxonMobil (XOM), which is a top 10 position. As of the end of May, financial stocks made up roughly 22% of the ETF's total holdings. And it's a Vanguard fund, so the expense ratio is microscopic (0.04%). It's large and liquid. And even better, it has performed similarly to the Russell 3000 Value Index... so it should work well for investors seeking to buy the recent dip in value stocks. (Full disclosure: I currently own a value-focused ETF in my 401(k) account. It's not the one that I've mentioned today... But I don't want to get in trouble with any lawyers.) How much will you make if you make this trade today? I can't possibly know that... But it's a good bet that you'll make more than you would by holding all the stocks that have been "no brainers" for more than a decade. Nothing outperforms forever. And the sun appears to be setting on the growth-stock hyper-bull market. By going long value stocks right now, I'm trying to reduce risk by buying stocks that are out of favor and have generally performed well for the past 10 months. And let's get this straight... Right now, almost nothing in the stock market is out of favor on an absolute basis. Nothing is absolutely cheap. The best thing you can find today is a stock (or group of stocks) that's relatively cheap in comparison with other stocks. That's exactly what this trade is... Value is cheap relative to growth these days, and it's more out of favor relative to growth than it has been in nearly 100 years. So it has excellent potential to become a great long-term trade. Even during my most bearish phases, I've always advocated against selling stocks in an attempt to avoid a bear market... That sort of timing is a fool's errand. I've always recommended continuing to hold your equities... That's because human progress is relentless – and you simply can't afford not to have a stake in it. Plus, as I always say, when you find a good business trading at a reasonable enough price, you should buy it... It doesn't matter if you think the overall market is expensive or not. You can't afford not to be a long-term equity holder. That's how the big money is made in equities – by buying right and sitting tight. You can buy a value ETF right now. Relative to the growth stocks everyone has been in love with for more than a decade, value is more attractive than it has been in nearly 100 years. The late stages of a huge bull market – like what we're living through right now – are a great time to put on contrarian trades... And buying a value ETF is perhaps the least risky contrarian trade you can make today. Plus, with interest rates making most bonds unattractive and the equity bubble making many stocks unattractive these days, this is one of the best long opportunities you'll find. And that's not all... Right now, I've identified another opportunity – a tiny stock with 200%-plus upside potential from here. To be clear, I never recommend a stock unless it checks off each of my five "must have" criteria. And this one has it in spades... I just put together a brand-new presentation where I share all of the details. You can watch it right here. Regards, Dan Ferris
August 12, 2021 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply sign up here. |
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